Disclaimer:
This web page is designed to aid farmers with their marketing and risk
management decisions. The risk of loss in trading futures, options,
forward contracts, and hedge-to-arrive can be substantial and no warranty
is given or implied by the author or any other party. Each farmer must
consider whether such marketing strategies are appropriate for his or her
situation. This web page does not represent the views of Kansas State
University.

What, Prices are NOT
lower?
Professor, all farmers and livestock feeders know Corn and Soybean prices
are high, not low! That is true; grain prices are higher than they were on
the crop insurance sales closing dates. However, when some of the estimated
crop insurance underwriting losses were being covered in the press last
summer, those prices were much higher. As a result, some analysts were
giving press releases suggesting crop insurance underwriting losses might
reach $40 billion dollars. What those press stories failed to state was
that those summer prices had no effect on indemnity payments for most corn
and soybean producers. Or if it was stated, most readers probably never
read past the head line of a $40 billion loss.

The harvest price will
not be final until the end of the month for most states, but the current
average harvest price is much lower than last summer. Soybeans are currently
down $2.24 from its summer high close and corn is off 77 cents. This is a
9.2% reduction in corn prices and 12.7% reduction in soybeans prices.

Assuming the harvest
price average remains at current levels, then the falling harvest prices are
cutting into indemnity payments for most farmers. Because most farmers have
RP, the market is reducing those payments by about 10% from last summer
levels when many experts were arguing that farmers would be paid more in
indemnity payments than their “expected” crop value. Even by the experts’
narrow definition of “expected” crop value, these falling prices will
prevent most farmers from exceeding their “expected” crop value. The
exception is those farmers who don’t have yield losses; their crop revenue
will far exceed the “expected” crop revenue. Farmers are nearly always
better off with a crop, with very few exceptions.

While RP payments will
be lower using the correct harvest prices than if they had been paid on
market traded prices in August, RP payments will greatly exceed indemnity
payments for those farmers who excluded the harvest price (RP-HPE) or
purchased Yield Protection (YP). An Indiana farmer with 80% coverage and a
drought-damaged crop will likely receive RP payments that are 30-40% higher
than would have been paid under RP-HPE, after premiums are deducted. Those
farmers with 80% RP-HPE and a 40% yield loss will collect nothing and still
owe the premium. Indiana corn farmers who excluded the harvest price cut
their premiums on average by nearly 50%, but then the RP-HPE coverage either
paid reduced payments or failed to pay. Very few farmers excluded the
harvest price and this year shows why most farmers don’t exclude the harvest
price. This is the type of year where farmers will need the indemnity
payments.

Farmers that excluded
the harvest price will benefit from prices falling because they will have
less revenue to count against the lower RP-HPE guarantee. However, it is
nearly impossible for the harvest price to end up below the base price this
year and as a result, there will be farmers who purchased RP-HPE with yield
losses and will receive no indemnity payment.

Those farmers with YP
neither benefit from lower prices or higher prices. Their indemnity
payments are based exclusively on those lost bushels. Those lost corn
bushels will be indemnified at $5.68 and soybeans at $12.55 per bushel, far
below their market value. However, because the base (spring) price will be
lower than the harvest price, YP will pay higher indemnity payments this
year than revenue protection with the harvest price excluded (RP-HPE),
unless yields are approaching zero.